Don’t laugh at Laffer – it is redistribution that's risible

Don’t laugh at Laffer – it is redistribution that's risible

by Eben Wilson
article from Monday 25, March, 2019

AT A PUBLIC MEETING the other night I was challenged by an attendee to agree how important “redistribution” is to social cohesion. I had been extolling the virtues of wealth creation by avoiding the dead hand of central planning and high tax rates. 

The exchange that followed illustrated how difficult it is for economists to explain themselves. Those of a statist disposition delight in using a technique known as “whataboutery” for non-engagement in debate.  My argument was that the less well-off are best served by allowing lower tax on wealth creators who will generate a demand and eventual scarcity of labour. Using new capital to support higher productivity is thus incentivised. Higher productivity means higher wages, more consumption and new jobs. Such is basic supply and demand economics. 

But social concern is a key driver of the interventionist so they deflect the conversation to the value of re-distribution not per se, but in terms of their world view, introducing a straw man that the rich avoid their taxes and so create division. Again and again, all economic arguments are moved onto the political ground of egalitarian aspirations and a conspiracy of the rich to hold onto their wealth.

In this process, quite a few intellectual somersaults and further deflections become common.  I tried to explain that evidence in OECD nations seemed to suggest that a total tax take above 40 per cent of the economy appears to become self-defeating. The reply to this was that “the Laffer Curve is a nonsense” (I had made no mention of the Laffer Curve) and a call to consider austerity in the light of Naomi Klein’s “Shock Doctrine” and Thomas Pikkety’s “Capital in the 21stCentury” (I had mentioned neither austerity nor inequality; the original question was about the usefulness of redistribution). 

Criticism of the Laffer curve as “an economic theory” is common among the left.  This, however, is a classic case of do-it-yourself (and self-serving) economics trumping quite an interesting insight.  The Laffer curve is not a theory, it’s simply an idea; originated on the back of a napkin  in a restaurant when Arthur Laffer had lunch with Dick Cheney and Donald Rumsfeld. By the way, Laffer himself does not like that it is named after him – he much prefers to debate the insights it suggests. 

The curve illustrates a simple relationship between tax rates and revenue raised. It’s anchored at both ends by two predictions. If you have a tax rate of zero you raise no revenue, and if you have a tax rate of 100 per cent you obtain no revenue, merely starving slaves.

However, somewhere between the 0 per cent and 100 per cent rates some revenue is raised and so there will be a curved relationship between tax rates and revenue with a maximum collection at some point.  

As such, the curve explains nothing, but it does raise questions. Where is the maximum revenue point and to what extent, and why, does revenue tail off up towards that point and then down to zero at 100 per cent tax rates? These are very interesting questions to inform policy on tax rates.  Rejecting Laffer as nonsense is – well – ducking the issues. 

Crucial to this deflection is a refusal by the left to engage in debate about the inherent complexity of multiple human behaviours in multiple markets through time.  In economics what are known “time-preferences” apply.  The value of using time to obtain new value is too often discounted. 

The Scottish Government, churning through its tax revenues faster than it can raise them is beginning, in my view, to reap the dis-benefits of its aspirational deflections and ignorance of the importance of time. If you look at the Scottish Fiscal Commission’s forecasts on tax  you will see lower projected revenues on income tax, business rates, LBTT and Landfill Tax. This is in the face of a deficit that, while it has reduced from recent absolute highs, largely due to offshore tax revenues, is stuck relative to the rest of the UK  and could increase further if oil revenues stall again. Meanwhile, Scottish Government spending is badly controlled through a continuing political focus on additional spending.  

In this, the SNP is ignoring a gradual and creeping deterioration in Scotland’s capacity to thrive. Scotland’s Laffer Curve should not be laughed at. Socialism will do what it always does through time; ration output, put people out of work, and generate resentment and impoverishment by destroying the potential of capital through time to create wealth. 

Ignoring economics may be delightful as one wallows in discourse with your fellow travellers based on mutual confirmation bias – but it’s not going to improve the lot of the poor or social cohesion if growth and improvement is held back. In fact the evidence of the twentieth century is that ignoring economic realities creates widespread poverty, division and in extreme cases suffering and death.  Think Venezuela. 

Redistributive policies are proper issues for debate in a civilised society, but deriving cohesion by taking from one person to provide for another is a two-way street, not something to be imposed by the people who concentrate only on aspirational outcomes. Imposition generally leads to a lack of cohesion; capital flight, gated communities and offshore bank accounts will happen.  

Redistribution can help social cohesion, if it is seen to be fair rather than equalising – and takes account of the effect on those from who the redistributions are taken – as well as those to whom the redistribution is made. 

The redistributive question then is about to whom and how much re-distribution should be used – which can be in conflict with lower taxes generating more funds to redistribute.  

In addition we have to consider whether, through the process of the distribution we design, the outcomes achieved do indeed lead to the socially cohesive outcomes desired.  And if we make social cohesion the goal, then those outcomes have to assessed by all parties involved – both at the time of the redistribution and through time following redistribution as those parties’ circumstances change. 

Any other approach is simply an expression of power; of prejudice against the future in order to achieve gains today; and ignoring what interest and incentives operating through time can do to the best of intentions through unexpected outcomes. 

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